Domestic Politics

Russia in 2006 was stable, prosperous, and self-confident. The year’s high point occurred in July when Pres. Vladimir Putin welcomed world leaders to his native St. Petersburg for the annual summit of the Group of Eight leading industrial countries (G8). Even the situation in the breakaway republic of Chechnya, while still giving cause for considerable concern, appeared to be gradually stabilizing. Putin’s popular approval rating soared to 79% after he hosted the G8 summit and security forces claimed responsibility for killing Russia’s most-wanted terrorist, Chechen rebel Shamil Basayev. A disturbing trend was the apparent resurgence of contract killings. Particularly shocking was the October murder, apparently by a hired gunman, of the investigative journalist Anna Politkovskaya.

Already preoccupying the Kremlin elite was the “2008 problem”—that is, the need to identify a successor to Putin, who would be constitutionally debarred from running for a third presidential term when his second expired in 2008. A series of measures enacted during the year seemed designed to ensure that the presidency would pass smoothly to Putin’s handpicked successor, whoever that might turn out to be. These measures included tighter state control over the mass media, especially national television channels; changes to electoral legislation to exclude independent candidates from running for the parliament and making it harder for smaller parties to win seats; and new registration procedures for nongovernmental organizations (NGOs). The Russian authorities said that new regulations allowing the monitoring of the activities and finances of foreign NGOs were intended to prevent foreign governments from using NGOs for political, as opposed to humanitarian, purposes, but there was anxiety among the NGO community that they might also be used to harass, persecute, or even close down NGOs of which the authorities disapproved.

A new federal institution, the Public Chamber, began work in 2006. Created on Putin’s initiative, it included well-known personalities and representatives of various social groups picked by the president and his administration. Described as a kind of ombudsman that would alert the authorities to potential sources of public discontent, the Public Chamber was tasked with commenting on the activities of the parliament, analyzing draft legislation, and monitoring the press.

In October three small parties—the Party of Life, Motherland, and the Pensioners’ Party—announced that they were merging to form a new centre-left party. To be called A Just Russia, this new party would support Putin, just like the right-wing United Russia party, which dominated the lower house of the parliament. Commentators interpreted the merger as a Kremlin-inspired attempt to form a loyal two-party system by attracting votes away from both the still-popular Russian Communist Party and the nationalistic Motherland.

The situation in Chechnya appeared to be gradually stabilizing as a result of Moscow’s policy of “Chechenization,” which saw the federal authorities distance themselves from the conflict by devolving responsibility for the everyday running of affairs to the Chechens themselves. By pitting Chechen against Chechen, this turned what had begun as a secession struggle into a civil war. As the pro-Moscow Chechen forces gained the upper hand, the separatists became increasingly marginalized. In March Ramzan Kadyrov, son of the republic’s pro-Moscow president assassinated in 2004, was appointed prime minister and assumed responsibility for social and economic affairs in the republic. Initially discounted as uncouth and uneducated, Kadyrov worked hard to rebuild Chechnya’s war-wrecked housing, roads, and schools, to restore running water and electricity, and to revive traditional Islamic customs. Many ordinary people welcomed his efforts, grateful for the order he imposed and for the improvements they experienced in their everyday lives. At the same time, human rights abuses remained high, many of them being attributed to troops loyal to Kadyrov. June saw the death at the hands of federal forces of Chechen separatist leader Abdul-Khalim Sadulayev. Sadulayev, a young Muslim cleric, was replaced as leader of the rebel forces by veteran warlord Doku Umarov. Umarov’s appointment was seen by many as meaning that the fight of the Chechen rebels would refocus on the search for political and territorial independence for Chechnya instead of on spreading radical Islam throughout the North Caucasus. Even so, instability continued to spread through the area, most notably to Ingushetia and Dagestan.

The Economy

Russia recorded its eighth year of strong economic growth, with the economy projected to grow by 6.5% in 2006. Living standards improved, and wages rose. Inflation was held below 10%, which made 2006 the first year of single-digit inflation since the collapse of the U.S.S.R. The macroeconomic situation remained strong, with large budget surpluses, high and rising foreign-exchange reserves, sharply reduced foreign public debt, and Western credit ratings agencies’ all placing Russian state debt in the “investment grade” category. While high world oil prices and a relatively cheap ruble played key roles in this economic resurgence, investment and consumer-driven demand were increasingly important. Domestic consumption, underpinned by high commodity prices, became the main driver of growth. Some commentators argued that growth could and should have been even higher, given the favourable external economic conditions, but there were still signs that Russia’s business community remained unsure about property rights and reluctant to make large-scale long-term investment in the home economy. The continuing slowdown in the growth of oil output appeared to be a direct result of the Yukos affair of 2003, which caused private oil companies to scale back their investment. In July the International Monetary Fund sounded the alarm about the increase in Russian spending planned for 2006–07. This increase was driven in part by the four “national projects.” Launched in 2005, these aimed to tackle Russia’s biggest problems—lack of housing, poor health care and education, and low quality of life in rural areas—and to serve as Putin’s presidential legacy. Delivering his annual address to the nation in May, Putin acknowledged that low birth rates, high mortality, and out-migration were creating a “critical” demographic situation in Russia; he pledged increased state aid to encourage women to have more children.

The Kremlin laid great emphasis in its economic policy on considerations of security and sovereignty. State ownership and control of strategic areas of the economy continued to increase—not only in the natural resource sector but also in aerospace, some metals, and motorcar manufacturing. Kremlin spokesmen referred at various times to different lists of strategic activities, in some cases including long-distance communications and financial services. These statements, together with the delays in producing a new subsoil law and a new law on strategic enterprises, heightened business uncertainty. The tenor of public pronouncements appeared to reflect the growing influence of those in the Kremlin who were wary both of the outside world and of independent sources of social and economic influence within Russia. At the same time, different parts of the state machinery were often at odds with one another, prompting suspicion that what was going on had partly to do with the grabbing of assets by highly placed officials and companies close to them.

Despite policies damaging to the business climate, economic performance was boosted by high and rising oil prices, so that Russia continued to run record trade and fiscal surpluses. Foreign reserves exceeded $270 billion, making Russia the third largest holder of gold and hard currency in the world. In July the ruble became fully convertible, formally establishing Russia as a fully open economy. The significance of this was largely symbolic, since the currency had long established current-account convertibility. In September Russia cleared its debts to the Paris Club of creditor nations. This too was symbolic, underlining Russia’s strong international finances and fiscal independence.

In December 2005 Putin spoke of the importance of energy to Russia’s standing and influence in the world, and in 2006 the Kremlin actively pursued the concept of Russia as an “energy superpower.” By various means the state increased its direct ownership of the oil industry from about 19% to about 34% of production, and plans were in place to raise it further. The gas industry had remained largely state-controlled since communist times, but here too the tendency was to increase the state’s ownership share, to close to 90%. Export pipelines for both oil and gas remained entirely under state control. Drafting continued of a new subsoil law that would specify which oil, gas, and metals deposits would be classed as “strategic”—that is, closed to development by majority-foreign-owned companies unless special exemption was granted. Successive drafts of the law reportedly kept raising the number of fields from which foreign investors were normally to be excluded. As a result, uncertainty about the real rules of the game for investors in the natural resource sector remained high. In the autumn Russia’s state-controlled gas giant, Gazprom, announced that it would proceed without foreign participation with the development of the Shtokman gas field in the Barents Sea. This was despite the fact that one year earlier Gazprom had invited bids and selected a short list of potential foreign partners to help it develop this large and difficult field. Toward the end of the year, the world’s largest oil and gas project, led by Royal Dutch Shell on Russia’s Far Eastern Sakhalin Island, was slowed down by state intervention on environmental grounds; the issue was finally resolved in December, when Gazprom announced that it was purchasing a controlling stake in the project.

If Russia wished to strengthen its reputation as a reliable energy supplier, this aim was not achieved. It began the year badly, cutting gas supplies to Ukraine over a price dispute and creating alarm among Western European countries that depended on Russian supplies through Ukraine. Then, at year’s end, Russia raised the prices it charged for gas to most of the other former Soviet countries. A row erupted between Russia and its close ally, Belarus, after Gazprom threatened to cut gas supplies unless Minsk accepted a steep price increase. Meanwhile, Western governments expressed concern over the interest shown by several Russian state-owned companies in acquiring foreign assets. Especially notable was Gazprom’s pursuit of gas-distribution companies in Western Europe. Concern was heightened because Gazprom did not reciprocate by allowing Western companies access to Gazprom’s own pipelines inside Russia.

In November, Russia and the U.S. signed a bilateral agreement concerning Russia’s accession to the World Trade Organization. Before Russia could become a full member, however, multilateral negotiations would have to be completed, a process that could take another year or so.

The initial public share offering of Russia’s major state-owned oil company, Rosneft, took place in July. This made headlines both because it was the largest IPO ever conducted on the London Stock Exchange and because an important part of the company’s assets had been acquired from the Yukos oil company at almost the same time the company was being forced into bankruptcy by the Russian state.

Foreign, Military, and Security Policy

In 2006 Russia assumed the presidency of the G8 for the first time. July’s G8 summit in St. Petersburg served as a potent symbol of Russia’s renewed economic and political status and its importance in world affairs. Russia’s newfound self-confidence was reflected in the Kremlin’s adoption of the concept “sovereign democracy” as its new ideology, and as the year progressed, Russian leaders grew increasingly assertive. Calls from critics, notably in the U.S., for Russia to be ejected from the G8 because of its poor human rights record were ignored. Russia responded robustly to criticism from Western countries, especially the U.S., that democratic freedoms had been curtailed during Putin’s second term in office. Particularly notable was a speech delivered in May by U.S. Vice Pres. Dick Cheney in which he accused Moscow of sending “mixed signals” over democracy and of using its energy resources as tools to “intimidate and blackmail” its neighbours. Putin hit back, speaking of a hungry wolf that “eats and listens to no one.” While Putin refrained from mentioning the U.S. by name, it was clear to whom he was referring. The exchange appeared to feed a growing conviction on the Kremlin’s part that the Western powers were out to hold Russia back and prevent it from assuming its rightful place in world affairs. Moscow accused the West of applying double standards and expressed strong irritation with what it saw as attempts to lecture it about its internal affairs. As a result, relations between Russia and the West grew increasingly prickly as the year wore on. The strengthening of relations between Georgia and Ukraine on the one hand and NATO and the European Union on the other was a source of particular tension. Further tensions arose as a result of independence referenda held in September in Moldova’s breakaway Transnistria region and in November in Georgia’s South Ossetia. At an EU-Russia summit in November, Poland blocked agreement on launching negotiations on a successor to the EU-Russia Partnership and Cooperation Agreement, which was due to expire at the end of 2007.

Russia began to take a more selective approach to cooperation with the rest of the world, appearing to grow less concerned about Western opinion and concentrating instead on building new strategic relationships with China, India, Venezuela, and other members of the nonaligned movement. The strength of Moscow’s ties with India and China was underlined when in July Putin held a trilateral summit in St. Petersburg with Chinese Pres. Hu Jintao and Indian Prime Minister Manmohan Singh—the first such meeting between the three countries. Russia also positioned itself as a mediator in the Middle East, maintaining close ties with Syria and Egypt. In March Moscow hosted the highest-profile foreign visit by Hamas since the Palestinian militant movement won January’s parliamentary elections in the Palestinian Authority. Russia continued to play a key role in Iran’s nuclear energy program, despite the fears of the international community that Tehran might be seeking to produce nuclear weapons under its cover. In September the two countries signed an agreement under which the nuclear power plant that Russia was helping Iran build in the city of Bushehr would be launched in September 2007. Russia joined the rest of the international community in expressing concern over North Korea’s missile and nuclear tests in July and October, and called for the resumption of six-party talks (China, Japan, the two Koreas, Russia and the U.S.) on North Korea’s nuclear program. In November British police launched a murder investigation after a former Russian intelligence officer, Alexander Litvinenko, died in London of radiation poisoning.

A U.S. congressional study published in October found that Russia in 2005 had surpassed the United States as the world leader in arms sales to less-developed countries for the first time since the Soviet Union collapsed in 1991. Russia’s total sales amounted to $7 billion, up from $5.4 billion in 2004. In addition to its traditional markets in China, India, Iran, and the Middle East, Russia also signed a series of major arms deals with Venezuela.

In May, Defense Minister Sergey Ivanov promised to speed up the modernization of Russia’s armed forces. He stopped short of promising that conscription would be eliminated altogether but said his aim was to ensure that by 2008, 70% of servicemen and all noncommissioned officers would be volunteers employed under contract.

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